The other day you got a call from Mutts on a Mission, a group that trains search and rescue dogs. You were told that, for a $50 donation to the group, you would get an official tax receipt for your donation, because the group is a registered charity.
What does it mean to be a “registered charity” and which organizations can register? This article answers these questions and goes beyond, introducing the benefits to registration and obligations that come with it.
What is a “registered” charity?
There are lots of groups doing charitable work in Canada, but not all are registered charities. To be registered, a charity must meet some legal tests and be accepted for registration by the Canada Revenue Agency (CRA), a government body.
When it agrees to register a charity, the Canada Revenue Agency assigns the charity to one of three categories:
- charitable organization
- public foundation
- private foundation
The choice of category depends on how the charity carries out its activities, the structure of its board of directors and its sources of funding.
- Charitable organizations focus on carrying out their own charitable activities.
- Public foundations focus on funding activities carried on by other groups, usually other registered charities.
- Private foundations can either fund other groups, or carry out their own activities, or do both.
Registered charities must respect slightly different rules depending on which category they fall into. To learn more about these three categories and the different rules for each, consult the Canada Revenue Agency’s guide Registering a Charity for Income Tax Purposes.
Four tests to be accepted for registration
Organizations must meet the following legal tests to become a registered charity.
1. The “purposes” of the organization must fit into one of four categories:
- relief of poverty (ex., food banks or groups that provide clothing and furniture to the poor)
- advancement of education (ex., providing scholarships, advancing science or operating museums)
- advancement of religion (ex., performing missionary work or operating buildings for religious worship)
- certain other purposes that benefit the community (ex., helping victims of family violence, protecting the welfare of children or operating animal shelters)
A charity’s purposes cannot be a mix of one of the purposes listed above and other purposes that do not fit within these categories.
Purposes mean the organization’s mission, or the reason it was created. Purposes are different from the programs and projects a charity uses to carry out its mission.
2. The organization must show that it provides a real benefit to the public.
The “public” can be either the public as a whole, or a significant section of it. An organization that only provides a benefit to its members or to a restricted group will generally not qualify.
To learn more, read the Canada Revenue Agency’s explanation of the public benefit test.
3. The organization must have been created in Canada and still be resident in Canada.
Charitable organizations created in Canada are considered to be residents of Canada. The requirement to be resident in Canada does not prevent registered charities from carrying on activities outside Canada, under certain conditions.
To learn more about this, consult the website of the Canada Revenue Agency.
4. The organization must devote all its resources to its charitable activities.
In other words, the organization’s money, property, employees and volunteers must all be used for its own charitable activities. The organization can gift money and property to “qualified donees,” such as another registered charity. Under certain conditions, granting subsidies to non-qualified donees could also be allowed.
For more information on qualified and non-qualified donees, consult our article Rules Registered Charities Must Follow.
A charity can qualify for registration even if it does not directly engage with individuals it aims to benefit: umbrella groups that improve the charitable activities of other community organizations can sometimes qualify.
Organizations that are not eligible for registration
Although they might do good work, some organizations don’t qualify for registration.
An organization will not qualify if some of its funds are used for the personal benefit of its members, shareholders or trustees.
Note that the rule against personal benefits does not prevent registered charities from paying reasonable salaries or expenses for the normal operation of their organizations.
Organizations that help a few specific individuals or that help private groups do not qualify for registration. For example, a group created to pay for someone to travel to Canada for surgery would not qualify.
Social clubs, leagues and mutual aid societies don’t qualify. Groups that have a mix of charitable and social purposes, such as service clubs, also don’t qualify.
However, a registered charity can use some of its resources for social activities if
- these activities are used to raise funds for its other activities, or
- the social activities are a very small part of the charity’s main purpose.
An organization will not qualify for registration if its purposes are political, such as
- promoting the interests of a political party, or
- supporting a candidate for public office.
To learn more, see the explanation of the Canada Revenue Agency about political purposes and activities.
Groups created for the purpose of promoting sports, such as minor hockey leagues, will not qualify.
However, groups created for another purpose, which is recognized as charitable, can carry out sporting activities in some situations:
- When sports are a reasonable way to carry out the group’s purposes. For example, a group created to help youth at risk could use sports to carry out those purposes.
- When only a very small part of the group’s resources is devoted to sports.
Note that there are special rules for amateur athletic associations that promote sports across Canada. These associations benefit from some of the same advantages as registered charities. To learn more, consult Canada Revenue Agency’s explanation about amateur athletic associations.
The differences between a registered charity and a non-profit
A lot of organizations do good work but don’t meet the tests for being a registered charity. Others simply choose not to register. These groups can operate as “non-profit” organizations.
A non-profit is an organization created and operated for any purpose except making a profit. For example, the purpose could be organizing recreational activities, improving community life or helping the poor.
Different rules apply to registered charities and other non-profits:
- Unlike registered charities, other non-profits are not automatically exempt from paying income tax. To be exempt, the income the non-profit receives generally cannot be used for the personal benefit of its members, shareholders or owners.
- When a registered charity stops operating, it must give any leftover money or assets (ex., property and equipment) over to a qualified donee, such as another registered charity. When another non-profit stops operating, it can distribute any remaining assets to its members or another organization.
For more information on non-profits, see the Canada Revenue Agency’s comparison of non-profits and registered charities or consult our article Starting a Non-profit: What Type of Organization Is Best for You?
Why choose to be a registered charity?
There are many benefits to becoming a registered charity. The main benefits are:
- the right to issue official tax receipts for donations (These receipts can reduce the income tax owed by the person or business making the donation.)
- exemption from federal and provincial income tax
- the right to a partial reimbursement of the GST and QST sales taxes
- the right to receive gifts from other registered charities, such as foundations
- credibility in the community (Since registered charities must respect rules about their finances and other matters, this can reassure the public that the charity is using its resources for truly charitable work.)
- donations or funding reserved to registered charities from foundations, businesses and government agencies
- special advantages given to registered charities by many provinces and municipalities
Is registration right for your organization?
While there are many benefits to registering your organization, there are other considerations to examine.
Respecting the legal obligations of being a registered charity takes time, money and an organizational structure. Handling the finances and reporting requirements of a registered charity is particularly complex.
Depending on the skills of the people working or volunteering for the organization, it might be necessary to hire outside help from accountants or other professionals to meet some of these obligations. It is therefore important to consider whether your organization has the resources to operate as a registered charity.
Tax Receipts and Sources of Funding
Tax receipts can reduce income tax owed by people and businesses that donate. It is therefore important to consider whether your potential donors might want to get a tax receipt.
Business sometimes prefer to do sponsorships rather than making donations. A “sponsorship” means giving money in return for the chance to advertise or promote a product or service. Since sponsorships can often be used as a deduction for tax purposes, getting a tax receipt will not be an advantage for businesses that want to sponsor instead of donating.
For more information on tax receipts and donations, consult our article Registered Charities: Donations and Receipts.
If your group hopes to get money from governments, you should check whether the government funding programs you are interested in limit funding to charities that are registered.
Registered charities do not have to pay income tax, but many groups that do charitable work without being registered are also exempt from these taxes, including some non-profits.
For organizations that aren’t exempt, income tax is only paid on profits, which is the money left over after paying expenses. As many organizations with charitable activities do not end up with profits at the end of the year, this exemption might not be a big advantage.
Finally, businesses are actually in a more favourable position than registered charities when it comes to sales taxes: businesses can claim back the full amount of sales tax they pay when they buy goods or services. Registered charities can only claim half the sales tax they pay. It may therefore be a good idea for your group to consider operating as a business, especially if you expect that any fees you charge will cover the costs of your programs and you expect to make a small profit.
Recruiting Directors or Trustees
Registered charities need people to oversee the affairs of the charity – either directors or trustees. Directors and trustees have legal duties, so it can be a challenge to find people to take on this role.
If a registered charity stops operating, it must give any leftover money or property to a qualified donee. It is therefore important to consider whether your group wants to accept this obligation.